Fighting Inequality Can Strengthen the US Economy

A one-pager free download from the Levy Institute on how higher taxes on the wealthiest Americans coupled with a comparable increase in public spending can not only redress political but also economic inequality while boosting consumption and aggregate demand in a sustainable fashion and reducing the dependence of these factors on rising debt levels. A brief summary below:

“Senators Elizabeth Warren and Bernie Sanders, along with Representative Alexandria Ocasio-Cortez, recently proposed to increase the rate of taxation on very high incomes and net worth. One of the primary justifications for such policies is that reducing inequality would help safeguard political equality. However, Dimitri B. Papadimitriou, Michalis Nikiforos, and Gennaro Zezza show how these tax policies, if matched by comparable increases in government spending, have the potential to boost aggregate demand while helping reform the unstable structure of the US economy.”

Austerity: 12 Myths Exposed

Social Europe has produced a booklet attacking many of the myths surrounding austerity. It is free to download here. Below is a short extract from the preface:

Austerity: 12 Myths Exposed debunks commonly held beliefs in support of austerity as a solution to addressing stagnation and economic crisis. Austerity staples like ‘live within your means’, ‘Swabian housewife economics’, ‘public spending hampers private investment’ and the new authority of alleged maximum debt and deficit levels, such as the Maastricht criteria governing the eurozone, are tackled and taken apart. While this booklet does not provide a full recipe for the end of austerity, those who are looking for alternatives will find a range of arguments needed to clear the pathway towards paradigm change. One thing is clear: austerity is a tool of national and international financial interests – not a solution to the problems caused by them.”

 

Tax, redistribution and economic performance: the micro and the macro

Alexandria Ocasio-Cortez, the youngest woman ever to be elected to the US Congress, has made headlines recently with her arguments for much greater marginal rates of tax on the highest earners. Oxford University’s Simon Wren-Lewis yesterday posted this helpful piece on some of the economics and politics of such a policy. He is broadly in favour, and makes a good case for it.

Wren-Lewis is something of a New Keynesian, coming from the centre-left of mainstream thinking. The post covers plenty of ground, but tends to only focus on the microeconomics, while neglecting the macroeconomics, of higher taxes and redistribution. Continue reading

Equality and growth – no conflict?

“To lay a factual foundation to the argument for raising the American income floor, we need to sweep away the remnants of an older view that policies cannot promote both equality and growth. The older view assumed an “efficiency-equity trade-off.” If such were true, then nothing could be done to foster economic growth without the collateral damage of greater inequality, or greater equality without the collateral damage of less growth.

History does not confirm such a trade-off. To remember why, first consider a simple point about the political process…A dominant historical outcome has been that vested interests have blocked initiatives that would promote growth and/or equality. A conspicuous example is the suppression of mass public schooling – an investment that clearly promotes both equality and growth. Our second consideration comes from the numbers: history does not record any correlation – negative or positive – between income equalization and economic growth, either in our new American history over the past 360 years or world history over the past 150 years. The correlation does not emerge, regardless of whether “growth” means the GDP per capita growth rate or its absolute level, and regardless of whether “equalization” means the share of social spending in GDP, some measure of policy-induced redistribution, the level of pre-fisc income inequality before taxes and transfers, or even the rate of change in any of these.

Economists have explored the effects on income per capita growth of three kinds of egalitarian variables: tax-based social spending and its composition; fiscal redistribution, measured by the gap between pre- and post-fisc inequality; and the greater equality of pre-fisc incomes before taxes and transfers. An empirical literature using contemporary world evidence finds that the growth effect of equalizing incomes is not significant. History agrees. American experience does not reveal any clear effect on GDP of greater tax-based social spending or more progressive redistribution from rich to poor. Indeed, recent analyses suggest that greater pre-fisc equality has a positive effect on growth. This result supports the argument that egalitarian investments in human capital simultaneously achieve more equality and more growth. While these statistical results can be and have been debated, they do not support any claim that equalizing incomes must lower growth. American income history offers no support either.

If there were any fulcrum at which historical insight might be applied to move inequality, it would be political…no nation has used up all its political opportunities for leveling income without harming economic growth. Improving education, taxing large inheritances, and taming financial instability with regulatory vigilance – the opportunities are there, like hundred dollar bills lying on the sidewalk. Of course, the fact that they are still lying there testifies to the political difficulty of bending over to pick them up.”

Peter H. Lindert and Jeffrey G. Williamson (2016), Unequal Gains – American Growth and Inequality since 1700, Princeton University Press, p.261-2.

There are influential theoretical arguments in economics supporting policies which promote growth by, on the one hand, increasing and, on the other, reducing inequality. The above conclusion to Lindert and Williamson’s comprehensive historical study of American growth and inequality is either ambivalent to or in support of a positive relationship between reduced inequality, certainly at its current level in many countries, and faster growth.

Their argument is that the forces generating inequality are largely exogenous (they come from outside the economic system), and so can be altered through policy without harming growth.

Clearly there are limits to this. Perfect equality of incomes and wealth would destroy the incentives required for economic activity. Ever-increasing inequality could also lead to the sort of social division and political instability which would be destructive of the status quo. Neither extreme is sustainable.

From a macroeconomic perspective, greater inequality can promote or reduce growth, depending on the economic context. If productive investment is constrained by a lack of savings, redistributing income and wealth to those economic agents who tend to save a larger share of their income, such as the wealthier members of society or firms, would provide the resources for that investment by increasing the economy’s savings rate. In this situation, greater inequality can boost growth.

This is an argument often associated with Marxist thinking and the central notion of the rate of profit or surplus in providing the resources and motivation for new investment. Growth is “profit-led”.

By contrast, if productive investment is constrained by a lack of consumption spending, then redistribution to those who consume a larger share of their income, normally the poorer members of society, will boost consumption and stimulate investment. In this case, reducing inequality can boost growth, while policies which increase it will lower growth.

This latter argument finds support in Keynesian and post-Keynesian thinking, so that spending for consumption helps drive investment spending. Growth is held back by “under-consumption” and is “wage-led”. If this is the case, then a strong argument can be made for win-win progressive policies which boost household incomes and wages and reduce inequality while raising growth.

Inequality shapes and is shaped by both economic and political forces. There is perhaps “plenty to play for” in terms of policies which promote greater social justice under capitalism, without undermining its foundations. In today’s climate, they are surely essential to sustaining those foundations.

Ha-Joon Chang: taxation is not theft

In a modern capitalist economy, taxation is not theft but a necessary source of funding for all sorts of public goods and services that make the economy and society function well. It also shapes behavioural incentives in ways that can further promote social welfare. This is worth reiterating. Many of us may not like paying taxes. Some public spending may be wasted, and it often benefits particular groups at the expense of others, although this is inherent to politics. But it remains an essential element of the good society.

Michael Hudson interview part 2

Following Tuesday’s video, here is more from this interview with Michael Hudson on Trump’s economic policies, from tax cuts and trade wars to infrastructure, privatisation, industrial policy, Wall Street versus Main Street and Artificial Intelligence and its effects on unemployment.